Abercrombie & Fitch Co. (ANF), L Brands Inc (LTD): Economics Of Retail

Analysts on a consensus basis anticipate the company to grow earnings by 11% on average over the next 5-years. The company currently trades at an 18.4 earnings multiple. The company has a bit of a premium priced into it as the earnings multiple is higher than the projected growth. This premium is driven by the high rates of historical growth (the company earnings grew by 50.42% on average over the past 5-years). The company also offers a 2.32% dividend yield. In the 2012 holiday quarter, (fourth quarter) the company was able to beat earnings estimates.

Lululemon Athletica inc. (NASDAQ:LULU) is a company that specializes in selling high-performance yoga-clothing. The spandex they sell is supposedly made of superior fabric. The company markets its products in the high-end mall locations. In its fourth quarter 2012 earnings release, the company was able to report $2,058 in sales per square feet (extremely good, Abercrombie & Fitch Co. (NYSE:ANF) reports in the $500 per square feet range). The high-end yoga concept seems to be working, as investors are highly optimistic about the company’s forward growth.

Analysts on a consensus basis anticipate that the company will grow earnings by 23.20% on average over the next 5 years. This high rate of growth will be driven by store openings in affluent markets all over the world. The management team believes that it can sustain its growth through international expansion. For now markets like Paris and Hong Kong are the company’s best bet. Lululemon Athletica inc. (NASDAQ:LULU) has a proven business model that appeals to the super affluent. The company currently has a 43.3 earnings multiple. The high earnings multiple puts it at a bit of premium relative to forecasted growth. But on the plus side, the company could surprise analyst estimates for the current fiscal year.

Conclusion

Fashion retail out-performs during periods of economic growth. Lingerie, teen apparel, and high-end spandex seem to be the most prolific growth opportunities in the space. The combination seems like a ridiculous way to generate investment yields, but then again it is never good to judge a book by its cover.

The article The Retail Sector Sports Some Great Returns originally appeared on Fool.com and is written by Alexander Cho.

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